In this article I will go over some of the brokerage accounts that U.S expats have open to them, but as will discuss in more detail it has become increasingly more difficult to invest since FATCA was introduced, in this article will go over some of the platforms that you have open to you as U.S expat, and the way that you can invest. covering, taxation and specif PFICs taxation, platforms and options for U.S expats.
First, will go over FATCA and why it is so hard for U.S expats to invest.
What is FATCA?
The FATCA law requires all non-US financial institutions, to search their databases for US clients, and to self-report. This includes insurance companies if there is a savings and investment element to the policy.
FATCA imposes a 30% withholding tax on any financial institution, that doesn’t reveal the identities of US account holders, within a specific period of time.
The costs of complying with FATCA are estimated to be about $200M for each foreign institution.
The cost of the regulation means that many non-US financial institutions no longer accept Americans as clients, including insurance companies if those insurance companies offer insurance with a saving and investing component.
In addition to that, many US individuals have had their American brokerage accounts closed, since they moved overseas.
For American expats, therefore, investment options have become more limited. Countless Americans living overseas, who aren’t lucky enough to have an HR department help them with the tax implications of investing overseas, end up confused by the paperwork and other requirements that go along with investing.
FATCA affects US connected persons and not just Americans.
Who are US connected persons?
The following people are considered US connected persons:
- Green Card holders
- Other visa holders living in the US. Although this can get complicated. H1B visa holders, for example, are only sometimes considered USconnected persons.
- US taxpayers
- You were born outside the US but have one US parent
- You were born in the US, even if you left as a child
Also note the passport you have is irrelevant if you were born in America.
Who does this affect?
This affects Americans living and working overseas, in any country, and US-specified persons. The majority of American expats live in Mexico, Canada, New Zealand, The UK, Germany, Sweden, Australia, UAE, Singapore, Israel, Costa Rica, France, Brazil, Colombia, Philippines, Mainland China, India, Hong Kong, Japan and South Korea.
There are, of course, American expats all around the world, including numerous places in Central and South America.
American Expat Investment Options – what are the realistic choices?
US expats have many options, including;
- Putting the money in your partner’s name – although it may not be the most sophisticated option, having the money in your spouse’s name (assuming they are non-Americans) is one simple option to overcome FATCA. This comes with various risks, of course, if you break up. This is especially risky in countries without a developed legal system, if divorce ensues.
- Another option is to continue contributing to your existing accounts in America, assuming they are open to American expats, which often isn’t the case. This does come with risks though, such as currency exchange fluctuations, and various banking fees. – This also isn’t an option for Americans who have lived overseas for 25-30 years, who no longer have US bank and brokerage accounts in many cases. Another risk is that your US brokerage will eventually follow in the footsteps of many others, and close your account.
- Tax-compliant investment services overseas. There are a limited number of platforms that can accept American expats overseas, which are FATCA-compliant, which I, and some other firms, can utilize. – The benefits of this approach are the capital gains tax are slim (0%-20% depending on many short and long-term factors), whereas non-compliant US investments can be taxed up to 37%. This approach also makes tax filing and compliance as easy and as convenient as possible.
- Giving up your American Green Card or Citizenship. This might seem like a big step, but more and more are doing it, with over 5,000 yearly cases reported, including Facebook founder Eduardo Saverin.
FATCA and double taxation on higher incomes have contributed to this situation. However, there is an exit tax for giving up your Green Card. Whether you pay the taxes depends on your immigration status and financial assets.
As a generalization, if you have lived lawfully in the US as a permanent resident, regardless of whether on a green card or as a US citizen, for eight out of the fifteen years ending with the expatriation year, could mean that you are subject to exit taxes.
If your income is above $160,000 per year, and/or your net wealth is above $2M, you are also more likely to be charged an exit tax. If you don’t meet these two criteria, and you have correctly filed for the last 5 years, then you are less likely to be hit by the exit tax.
If you haven’t filed out your tax forms correctly, the penalties can be severe. For instance, the penalty for not having filed the FBAR (Report of Foreign Bank and Financial Accounts) or the form 8938 (the statement of Specified Foreign Financial Assets) can be up to $10,000 per form per year.
In such situations, a taxpayer should consider entering into an IRS tax amnesty program to clean up the past and minimise penalties.
Giving up US Citizenship is a big step, with tax and personal implications, so shouldn’t be taken without huge amounts of research and professional advice sought.
In general, option 3 is the best option for most Americans living overseas.
Frequently Asked Questions
This section will cover some FAQs.
Can a US citizen who is living overseas invest in Vanguard or other mutual funds?
Vanguard used to be able to accept American expats, but this is no longer the case. However, some of the US tax-compliant platforms can accept various low-cost funds and other investment options.
Most passive funds work in similar ways these days, in any case, there are so many ‘Vanguard-like’ funds that exist in the market.
What does a client need to do?
FATCA requires all US taxpayers with financial assets exceeding $50,000 to report these on IRS form 8938, attached to the taxpayer’s annual tax reports. Many institutions will help US expats with tax filing, or make it as easy as possible to do it themselves.
Who is considered US Status or US specified persons?
The following people are considered US specified persons;
- Green Card holders
- US birthplace
- Has US residential address
- Sending instructions to transfer funds from the US
- A power of attorney granted to a person with a US address
What about joint accounts – if one person is American and one is non-American?
In this case, FATCA still applies, unlike if you put 100% of the money in your partner’s name. It is subject to the same reporting as a US person.
What about people who took out accounts before FATCA was enacted?
Americans who took out insurance or financial accounts overseas before 2013, should still receive tax advice, as they will still need to report any financial activity.
What if my family or friends in the US sends me money?
Money sent out of the US will not trigger FACTA withholding. In comparison, money sent into the US, and income earned in a US account, may be subject to FATCA.
Could FATCA be rolled back?
There has been speculation that The Trump Administration may roll back or repeal FATCA reporting. This is just speculation at this stage, and cannot be relied upon. Laws can always become less, or more, strict with time. A rational investor can only make decisions based on the information he or she has available to them.
Does FATCA affect health, life and other insurance products?
Many health and life insurance providers, such as AXA, also provide investment products. Many of these providers can no longer accept Americans.
Providers that only provide non-investment-linked insurance products, in comparison, can usually still accept American expatriate clients.
Are foreign mutual funds more heavily taxed?
Yes. The IRS considers foreign mutual funds as Passive Foreign Investment Companies (PFIC), and these are subject to high taxes
Should I contribute to my employer’s scheme?
Many employers offer excellent schemes, where they contribute $1 for every $1 you contribute. However, this is only a good idea if the scheme is US tax-efficient, otherwise, you will still have tax issues.
Do American expats pay taxes on income?
All Americans living overseas need to file a tax return. However, most Americans do not pay income tax in the US, unless they are earning over $101,000 per year.
How about US legacy estate planning?
Your US estate plan, including wills and trusts, may not be viewed the same way in your country of residence, as in the US. If you have these plans in place, therefore, it makes sense to contact an expert in this space.
What’s the best brokerage accounts for American expats?
There is no best option per see, just that some are tax-compliant and reasonably priced, and some aren’t. Brokerage accounts for US citizens living abroad, that are tax and price-efficient, are few and far between, but exist.
Should Americans expats have a specific US financial advisor, who specializes in US non-resident matters?
This isn’t always needed, as most expat financial advisors are aware of the issues many US expats face. Financial advice for US expats is specific, however, so the financial advisor should know about the specific issues non-residents face.
What are some of the key mistakes I have seen when it comes to expat retirement planning?
An even more common mistake than making bad investments is deciding to not save and invest at all because the process seems too complicated. Most expats, and non-Americans alike don’t have access to local social security and pension programs, which means that poverty can await in retirement.
This is especially the case if expats move from country to country. Expats who stay in numerous European countries for 30 years plus, are often entitled to reasonable local pensions.
Over-reliance on your country of residence is another key mistake for American, and non-American expats, alike.
It can be difficult to say no to local stocks and real estate when you regularly go to dinner parties or bars, where everybody is talking about it.
However, most emerging markets are very high-risk. I have seen many expats get caught up in the mania.
Furthermore, tax laws are always changing, so it is important to ask your accountant and investment advisor to be up-to-speed.
As a final note, it is always prudent to get independent tax advice.
Are non-US investment accounts always expensive?
Not always. Some options in the overseas market are cost-efficient and are available with low account minimums.
In the US, it is normal for financial advisors to only accept larger accounts. Many advisors have account minimus of $250,000 a year, or even higher.
PFIC?
Passive Foreign Investment Company. States any pooled investment registered outside the U.S. is deemed liable to PFICs, includes, funds, investment trusts, and foreign pension investments.
PFICs are taxed with much higher rates than U.S. mutual funds, stocks or exchange-traded funds.
What is a PFIC and how to tell?
PFICs is anything that is not based in the U.S, so any non-U.S stock or mutual fund. One aspect is that if you are holding a U.S fund I.E Morgan Stanley, that holds foreign stocks or funds, this is not deemed a PFICs. However, anything outside of the U.S a fund with HSBC for example would be deemed as PFICs.
A way to tell is if it has one of these two characteristics
- 75% or more of its gross income for the taxable year is passive income, or
- At least 50% of its assets are held to produce passive income.
What are the tax liabilities of PFICs?
PFICs has a number of ways of being taxes depending on how it is structured.
- Qualified Electing Fund, this is taxed on your PFIC pro-rata share on undistributed earnings, on the long term and ordinary income. This will need specific documentation prior to set up.
- Mark to Market, this is where it is treated as if you sold the stock on the last day and bought and repurchased it back at its fair market value with value taken on the last day to calculate your gain or loss. The increase is taxed at your ordinary gains. This option needs to documented before you opt to buy as can’t change midway through the investment.
- 1219 If you choose this route, you’re taxed on excess distributions and would then realize gain on the sale or disposition of stock holdings.
I hope I managed to cover the topic of ‘PFICs Tax Explained’ if you would like more guidance on this subject, please use the form below to send me any questions and I can arrange a call if it is required.
How to stop PFICs?
I have touched on this before, but it is limited, some private banks, do offer some solutions that can make tailor-made portfolios, in U.S, stocks that are not affected by the PFICs. Even then I would argue that the Private bank’s options are limited.
This is even more applicable for those who do not meet the minimum requirement for the bank. As many accounts, will not accept you either in the U.S due to not having an address or in the country of residence.
I want to break down what a PFIC is and how you can utilise them to reduce your tax bill potentially, depending on your circumstances. I hope by the end I will have explained what a PFIC Tax is and how it might affect you and what you can do about it.
What platforms can I invest in?
Some platforms, allow U.S expats, IBKR can allow you depending on where you are living in the world, also some Brokers might let you invest as a U.S connected person abroad such as TD Ameritrade.
These platforms are some of the best around in terms of price, and trading and are widely used and reputable both in and out of the U.S.
If you can’t open these as they might only let you in you are transferring a 401k into an IRA or in certain locations.
The other platforms, you have open are more British or Australian, Praemium, Ardan, Novia, Platform One, I will not go into too much detail on the platforms, but have written individual reviews on them, in summary, the platform’s cost is 0.3%-0.5% with dealing costs $10-$35 depending on the type of securities you are trading, in term of range all have a range of 3000+ funds and stocks in USD and GBP and are based in locations such as the Isle of Man. For more information on these please read my individual reviews on the platform, or go to their website:
- https://www.praemium.com/uk/
- https://www.platform1online.com/
- https://novia-global.com/
- https://platform.ardan-international.com/Auth/Login?returnUrl=~/retail
But, one way to invest as a U.S expat with PFICs is setting it up though a UAP group that will then allow to invest in these platforms.
The UAP group identifies as
“It was identified that there was a gap within the market for a modern dynamic trust and pension company utilising the most current applications, and so The UAP Group of companies was created to develop a suite of products that would meet the needs of people of any nationality wherever they reside.”
Source UAP Group
https://theuapgroup.com/about-us/embed/#?secret=hy8GXbjAij
What is offered to U.S expats?
This is defined under Guernsey as a defined “Define contribution retirement benefit plan” that it approved by the Guernsey Income Tax authority.
I will put a link to all the technicalities of offerings below. However, I will try and sum it up in a simple fashion.
It offers a contractual base Guernsey contract. The contract is written by Bourse pension trustees Ltd and is paid by the member and investors from instructions from the member or the member’s financial advisor.
The value is based on the value of the investments and in the drawdown of the pension at age 55 or over (this can be deferred till 75) will continue to give an income for life. The drawdown is based on GAD rates and allows a flexi drawdown with 30% PCLS at the age of 55.
Simply put its works a lot like a Roth IRA with after-tax dollars (Pounds or Euros), with different factors being the age that you can drawdown on and income levels requirement, that with Roth IRA is set at $140,000 for single filers or $208,000 for married couples, and no contributions limits ($6000 for under 50s in Roth IRA and $7000 for over 50s).
You have investment options in what you invest in and the tax is taxed on the gains on withdrawal and the structure doesn’t include PFICs.
A full link can be seen on the link below
https://theuapgroup.com/wp-content/uploads/2021/06/UAP-US-Brochure-Final-VI.pdf
Why it might be useful to U.S expats?
Simply, put you don’t have many options, unlike British citizens or many other citizens living abroad. They don’t have the complication of tax filing on investments offshore and many offshore companies are open to dealing with them.
As a U.S expat, many investments are not feasible for many options as many platforms don’t want the obligation of dealing with the IRS and as a result, they don’t accept U.S expats.
The UAP contract act’s in a number of ways like a pension plan that you would have back in the U.S, with an after dollars IRA or Roth IRA.
The fact that it is portable with you as an expat, easy to file your taxes without the complications of dealing with PFICs and not taxed every year are some of the prime reasons to review as an option.
Instead, you are taxed on the gains on withdrawal. This can make a big difference as if you wanted to go in an actively managed fund such as Blackrock an accountant filing your taxes will need to know what they sold within the tax year within the fund plus the dividends that were distributed. This can be a pain, to say the least, and can potentially cost more on accountant fees for complications.
Furthermore, if you are a U.S expat in the U.K or Europe (which are around 1-2 million according to U.S diaspora) you might want to invest in GBP or EUR and investing in an active European or U.K fund, which would not be feasible. With UAP, you do have wider option’s to invest in and have potentially more investing options with only getting taxed on the gains, which for a younger investor or those with a larger investment amount can add up as allow more time to compound.
Some of the key advantages are
- IHT planning for high net worth individual over $11.7 million
- No contribution limits
- Investment flexibility
- Simple tax reporting
- Investments grow tax-free
Who is this for and who is it not for?
As I have described earlier in the article, the key points are that it works as a pension that you can withdraw at the age of 55. This inadvertently means it is not for anyone needing or wanting liquidity in their investments prior to 55. One way I would use it is like an IRA where you contribute and can’t take it out till a set age (IRA 59.5 and UAP 55).
Other than that it can be used in a number of ways U.S expats that are looking to set up a pension plan or those with surplus wealth that want to invest in PFICs companies and funds, with the ability to grow tax-deferred.
This is designed for U.S citizens who are offshore.
Is it safe?
In terms of the set-up, it is safe as it is set up by contractual law and this is one that is accepted in many locations as a sound frame of law.
In terms of the companies involved I will put a link below:
For me, I see the two main factors in terms of safety, the jurisdiction, Guernsey. This is deemed appropriate here is an overview of the jurisdiction.
Guernsey is a well regulated British Crown Dependency and remains a jurisdiction of choice for companies and individuals seeking trust, corporate and pension products and services.
Guernsey has long been considered a centre of excellence for the provision of offshore financial services. The Island is renowned for its robust yet pragmatic regulatory environment and is on the G20 ‘white list’ as having substantially implemented internationally agreed tax standards.
Guernsey is not part of the United Kingdom and has the autonomy of internal government, including taxation. The legal system is derived in part from the customary laws of Normandy but has been strongly influenced by English law. In addition, Guernsey is not part of the European Union and therefore EU directives on fiscal harmonisation, financial services and company law do not have effect in Guernsey. In this respect, Guernsey enjoys significant advantages over other jurisdictions.
All aspects of the Island’s financial services industry are carefully regulated by the Guernsey Financial Services Commission (“GFSC”). Financial services businesses such as Bourse are licensed by the GFSC according to their activities.
The other considerable factors as where and whom it is invested with this can be a range of investment options platforms and would speak to IFA about this in more detail.
US Expat Investment Advice – Who can help and Why?
Investments for Expats is the leading international online broker of expatriate financial services, products, and expat financial advice. We allow U.S expats, to invest in funds that are easier to fill on tax and not subject to PFICs as well as only being taxed on withdrawal on the gains.
Mainly this works like a ROTH IRA, with differences on a lower age (55) and withdrawals (speak to IFA for full details)
- Impartial advice – We offer U.S expats, options that can go with them in the world.
- Quality Financial Products – we offer quality U.S expat financial products and services globally from the world largest and leading banking institutions and funds houses.
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- Independent – we are non biased as we are not tied to any provider or product.
- 5 star reviews on google reviews
US Expat Investment Advice – Solutions
- Fully U.S
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- Flexible access to all of your invested funds, without any penalty fees and the ability to draw down an income.
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